A recent English case illustrates how difficult it is to rely on the doctrine of frustration to bring a commercial lease to an end. Although the outcome was probably predictable, the High Court decision in the case taken against the European Medicines Agency (“EMA”) by its landlords at 25-30 Churchill Place, Canary Wharf in London will be of considerable interest to the real estate industry in the UK and beyond and to legal advisers generally.
The case was taken by EMA’s landlords after they received a notice from EMA to indicate that, if Brexit occurred, EMA would be treating Brexit as a frustration of its lease. EMA relied on a number of grounds in the proceedings that followed. Central to its arguments were that as an agency of the European Union it was not legally permitted to be located outside of the European Union and so neither it nor any other EU agency could use the premises. It is easy to see how Brexit poses a difficulty for EMA, but legal frustration is more than being frustrated in the ordinary sense. Mr Justice Marcus Smith considered the caselaw including the general test for frustration laid down by Lord Radcliffe in Davis Contractors Ltd v Fareham UDC, which requires performance of a promise “radically different” from the original promise. He concluded that in this case the lease would not be frustrated on the withdrawal of the United Kingdom from the European Union, nor would the EMA's European Law obligation to move its headquarters from London to Amsterdam constitute a frustrating event.
In his judgment Mr Justice Smith observed how the doctrine of frustration was “not to be lightly invoked” while also acknowledging that its application “cannot safely be performed without the consequences of the decision, one way or the other, being measured against the demands of justice”. As part of his consideration of the facts and the contractual terms of the arrangement between EMA and its landlords, Mr Justice Smith found that the premises had been adapted for the EMA, that the EMA had received an inducement package to enter into the lease, and that the lease didn’t include any express contractual right to break. Also, and importantly, the lease did include generous rights for the EMA to assign and sub-let which were available to the EMA to be invoked.
Commentary on the judgment in the UK is tending to present it as a win for landlords. However, the Judge did not find that Brexit could not be a frustrating event in any lease or contract. In his conclusions, he confined himself to the specific lease and facts before him. Some may also choose to view the decision in a political light – for example, as warding off any legal uncertainty that the London office market might face as a result of Brexit. From a pure legal viewpoint, we see no surprise in the decision; the judgment signals no change to the current interpretation of the doctrine of frustration, under which it is traditionally very difficult to succeed. However, the size of the future rent payments in this case (estimated at £500m+) may encourage EMA to appeal the decision.